Many retirees aren’t sure what money to withdraw first in retirement to cover routine living expenses. I’ll cover your choice of accounts including; taxable, Roth or your IRA/401K.  The idea is that in retirement you will need to supplement your income from Social Security, pensions and maybe an annuity (which I don’t necessarily like) with money you’ve saved in various accounts. I call this filling the GAP. If you want to know more about determining your GAP just click here and read my article. Much of your consideration on withdrawals is based on tax planning.

Here are some helpful tips:

1.       First off if you are over 70 ½ years old you MUST meet your RMD (Required Minimum Distribution) from your IRA accounts. This is a requirement and the IRS tax penalty is quite high.

2.       Secondly, take money from a taxable account, for example your brokerage account.

3.       Lastly, spend money from your Roth account, IF your current tax rate is HIGHER than what you expect it to be in the future. If not do not spend from your Roth, but instead spend from your IRA account.

Now, some of #3 needs a further explanation and you may need to consultant a tax adviser. By the time you get to option #3, each dollar withdrawn makes a tax difference.

Another strategy to consider. If you have done a good job of tax planning and you don’t need money from your Roth, save the Roth for larger unexpected expenses. This way if you need to say cover an unexpected $20,000 expense in retirement, withdrawing this amount from either a taxable or IRA account could be a substantial tax hit, but there will be no extra taxes if you use your Roth.